March 2009

March 31, 2009

The Obama Administration has announced its determination of the viability of General Motorsand Chryslerand has set out a new “finite path forward for both companies to restructure and succeed.” According to the administration’s fact sheet, each company will have a set period of time and an adequate amount of working capital to establish a new strategy for long-term economic viability. The process includes leadership changes at GM and a 30-day period for Chrysler to reach an agreement with Fiat. The Administration said that “a structured bankruptcy process--if needed here--would be a tool to make it easier for General Motors and Chrysler to clear away old liabilities so they can get on a path to success while they keep making cars and providing jobs in our economy.” The administration has also issued a commitment to consumer warranteesunder which it will stand behind new cars purchased from GM or Chrysler during this period. Edward Montgomery, a top labor economist and former Deputy Secretary of Labor, will serve as Director of Recovery for Auto Workers and Communities.

Sen. Chris Dodd, D-Conn., Chairman of the Senate Committee on Banking, Housing and Urban Affairs, and Rep. Barney Frank, D-Mass., Chairman of the House Financial Services Committee, have pledged to work with each other and the Administration to modernize the country's financial regulatory system. In a letter to President Obama, sent as he prepares to leave for the upcoming G-20 Summit Meeting in London, the chairmen said they would work “expeditiously, carefully and deliberately” to create a framework for 21st century regulation that will enhance financial stability and protect consumers and investors.

Domestic Policy Subcommittee Chairman Dennis Kucinich, D-Ohio, has sent letters to federal officials involved in the merger of Merrill Lynch and Bank of America requesting documents about their knowledge of $3.62 billion in bonuses Merrill Lynch paid top executives at the company just weeks before $25 billion in federal aid was given to Bank of America for the merger. Kucinich states that: the bonuses were 22 times the size of the bonuses AIG awarded; they constituted a significant share (36.2 percent) of TARP funds allocated to Merrill Lynch; and they were not locked in by preexisting contract and were performance bonuses, as opposed to retention bonuses. Kucinich also noted that the Merrill Lynch Compensation Committee awarded the payments on Dec. 8, 2008, before the end of the fourth quarter, in which Merrill lost more than $15 billion, and after Merrill was informed that it would be allocated $10 billion in TARP funds. “These payments raise significant questions about what information Merrill Lynch and Bank of America executives shared with federal officials that oversaw the Merrill acquisition by Bank of America. Ordinary shareholders were unaware of the details of the bonus payments, but the U.S. government held 800,000 shares in preferred stock and warrants at the time and federal officials regularly met with both Bank of America and Merrill Lynch executives,” according to Kucinich.

The Fed is “committed to employing all available tools to promote economic recovery and to preserve price stability,” according to Governor Elizabeth A. Duke, in a March 30, 2009, addressbefore the University of North Carolina Banking Institute in Charlotte, N.C. Duke's speech, “A Framework for Analyzing Bank Lending,” examined the flow of credit to households and businesses and described the evolving role of banks in the U.S. economy. She noted that not all banks have been equally affected by the financial crisis: “As such, some banks have likely fulfilled the credit needs of consumers and businesses that had been turned away by their peers.”

Rep. Mike Castle, R-Del., a senior member of the House Financial Services Committee, has introduced legislation, H.R. 1754, to create a systemic risk regulator. The measure is a companion bill to S. 664, a measure introduced by Senator Susan Collins, R-Maine, that would create a new federal systemic risk regulator to monitor the financial markets and oversee financial regulatory activities. Eschewing the Federal Reserve Board for such a role, the companion bills, both named the Financial System Stabilization and Reform Act, would create an independent Financial Stability Council to serve as systemic risk regulator. The Financial Stability Council would be composed of representatives from the Fed, Securities and Exchange Commission, Commodity Futures Trading Commission, Federal Deposit Insurance Corp. and National Credit Union Administration. The council would maintain comprehensive oversight of all potential risks to the financial system and would have the power to act to prevent or mitigate those risks.

March 30, 2009

As the legislative overhaul of the regulation of the financial markers looms, there is a growing consensus that the global financial system has crossed the Rubicon and there will be no return to the world of Glass-Steagall separation of securities and banking activities and the days of originate and hold before securitization. The recent UK FSA report on regulatory reform rejects a return to the historic separation of banking and securities market activity. While acknowledging the theoretical clarity of this model, the FSA said that it would be difficult for any one country to pursue a clear separation while other countries did not, and there is unlikely to be an agreement on an appropriate division, given the very different historic traditions in the US and Europe. Moreover, it is not clear that in its extreme and simple form, it is practical in today’s complex global economy. Thus, large complex financial institutions spanning a wide range of activities are likely to remain a feature of the world’s financial system.

An audit by the SEC’s Office of Inspector General discovered that, despite the tremendous amount of attention the practice of naked short selling has generated in recent years, the Enforcement Division has brought very few actions based on conduct involving abusive or manipulative naked short selling. The OIG also found that Enforcement forwarded few naked short selling complaints to Headquarters or Regional Office enforcement staff for further investigation. None of the forwarded complaints resulted in enforcement actions, though one of the complaints referenced a pending enforcement action involving naked short selling.

In an Op-Ed item in a recent edition of USA Today, Rep. Spencer Bachus, R-Ala., the Ranking Member of the House Financial Services Committee, called the Treasury draft legislation granting federal regulators greater resolution authority “overreach[ing] and grant[ing] powers that are far beyond what is necessary.” Bachus added “Before we grant this exceptional authority to an executive branch agency, we should examine other alternatives. One obvious process is bankruptcy. The difference between bankruptcy court and the process proposed by [Treasury] Secretary Geithner is that the bankruptcy courts operate in a public forum with long established policies, rules, procedures and stakeholder protections.” http://republicans.financialservices.house.gov/index.php?option=com_content&task=view&id=468&Itemid=43

In its move to increase transparency, the Treasury Department has posted the investment contracts it has entered into with banks under the Capital Purchase Program (CPP). Unless otherwise noted, contracts with the following banks were executed on March 13, 2009: 1st United Bancorp, BancIndependent, Bank of George, Blackhawk Bancorp, Butler Point, Discover Financial Services, First American International Corp, First National Corporation, First Northern Community Bancorp, First Place Financial Corp., Haviland Bancshares, IBW Financial, Madison Financial, Provident Community Bancshares, Provident Community Bancshares, PSB Financial (Feb. 27, 2009), Salisbury Bancorp, Sovereign Bancshares and St. Johns Bancshares. http://www.treasury.gov/initiatives/eesa/agreements/index.shtml.

National Credit Union Administration Board Member Gigi Hyland said, “That is credit union grassroots at work,” in her response to the 1,400 credit unions that e-mailed her expressing their opinions about the NCUA Board’s corporate stabilization efforts. The e-mails addressed the need to spread the costs of the stabilization efforts over a longer period of time, and they requested enhanced transparency on the information underlying the NCUA’s corporate stabilization efforts. Hyland noted that, on March 26, 2009, the Board approved a proposal, which if enacted by Congress, would establish a Corporate Stabilization Fund and spread the costs of premiums and assessments over a period of up to seven years. Hyland also pledged to continue reviewing other available alternatives to further mitigate the cost to credit unions. “These are difficult and challenging times for credit unions. While the agency must take appropriate supervisory action to assure the National Credit Union Share Insurance Fund is protected, we must also explore alternatives that alleviate the impact on credit unions.” http://www.ncua.gov/news/press_releases/2009/HylandStatement.pdf